ECON 103 MT #2 Ch 5

quantity equation for money, bit itself

may be thought of as a definition for velocity

When a person purchases a 90-day Treasury bill, he or she cannot know the

ex post real interest rate

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the:

expected inflation rate

The ex ante real interest rate is based on ____ inflation, while the ex post real interest rate is based on ____ inflation

expected; actual

The percentage of government revenue raised by printing money has usually accounted for

less than 3 percent of government revenue in the United States

The ex ante real interest rate is equal to the nominal interest rate:

minus the expected inflation rate

The real return on holding money is

minus the inflation rate

Evidence from the past 40 years in the United States supports the Fisher effect and shows that when the inflation rate is high, the ____ interest rate tends to be ____

nominal; high

The transactions velocity of money indicates the ____ in a given period, while the income velocity of money indicates the ____ in a given period

number of times a dollar bill changes hands; number of times a dollar bill enters someone's income

If the demand for real money balances is proportional real income, velocity will

remain constant

Equilibrium in the market for goods and services determines the ____ interest rate and the expected rate of inflation determines the ____ interest rates

ex ante real; ex ante nominal

The demand for real money balances is generally assumed to:

increase as real income increases

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must

increase by 1 percent

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:

increasing

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in:

inflation of 1 percent and the nominal interest rate of 1 percent

The income velocity of money:

is defined in the identity MV = PY

If income velocity is assumed to be constant, but no other assumptions are made, the level of ______ is determined by M.

nominal GDP

The general demand function for real balances depends on the level of income and the

nominal interest rate

The opportunity cost of holding money is the

nominal interest rate

The real interest rate is equal to the:

nominal interest rate minus the inflation rate

The rate of inflation is the:

percentage change in the level of prices

The definition of the transactions velocity of money is

prices multiplied by transactions divided by money

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the

real interest rate is constant

A positive relationship between nominal interest rates and inflation in the United States is obvious in:

recent data but not nineteenth-century data

When the demands for money parameter, k, is large, the velocity of money is ____ and money is changing hands ____

small; infrequently

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

the Fed

If the nominal interest increases then:

the demand for money decreases

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases

the nominal interest rate

If velocity is a constant and, in addition, the factors of production and the production finction determine real GDP, then

the price level is proportional to the money supply

In the long run, according to the quantity theory of money and the classical macroeconomic theory, if velocity is constant, then ____ determines real GDP and ____ determines nominal GDP

the productive capability of the economy; the money supply

The quantity equation, viewed as an identity, is a definition of the:

transactions velocity of money

The quantity theory of money assumes that

velocity is constant

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is:

-4 percent

5

5

If the quantity of real money balances is kY, where is k is constant, then velocity is:

1/k

During the American Revolution, the price of gold measured in continental dollars increased to more than ____ times it previous level

100

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200000, then real balances in the economy equal:

20000

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ____ percent

3

According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

3 percent

According to the quantity theory a 5 percent increase in money growth increases inflation by ____ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by ____

5; 5

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ____ percent

7

Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy?

7 percent

Percentage change in P is approximately equal to the percentage change in:

M minus percentage change in Y plus percentage change in velocity

The ex post real interest rate will be greater than the ex ante real interest rate when the:

actual rate of inflation is less than the expected rate of inflation

Real money balances equal the:

amount of money expressed in terms of the quantity of goods and services it can purchase

"Inflation tax" means that

as the price level rises, the real value of money held by the public decrease

In recent US experience, inflation has:

been persistent from year to year, whereas in the nineteenth century inflation had little persistence

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on:

both the current and expected future money supply

If the Fed announces that it will raise the money supply in the future but does not change the money supply today

both the nominal interest rate and the current price level will increase

The inflation tax is paid:

by all holders of money

If the money supply is held constant, then an increase in the nominal interest rate will ____ the demand for money and ___ the price level

decrease; increase

The income velocity of money increases and the money demand parameter k ____ when people want to hold ____ money

decrease; less

Consider the money demand function that takes the form (M/P)^d = y/4i, where M is the quantity of money, P is the price level, and Y is real output and i is the nominal interest rate. What is the average velocity of money in this economy?

4i

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ______ times per year.

5

Using decade-long data across countries from 2000-2010, countries with high money growth ten to have ____ inflation

high

Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have ______ rates of inflation and decades of low money growth tended to have ______ rates of inflation.

high; low

If the transactions velocity of money remains constant while the quantity of money doubles, the:

price of the average transaction multiplied but the number of transactions must double

The right of seigniorage is the right to:

print money